California’s state legislature recently passed SB-826, a bill mandating that companies headquartered in the state include female directors on their boards. Signed into law on Sept. 30, it will require that, by the end of 2019, each publicly traded company based in California must include one woman on their board of directors; the quota increases by the end of 2021 based on company size.

While that first-in-the-nation initiative battles back legal challenges, new efforts are also afoot with the same, or greater, diversity goals in mind.

At the Securities and Exchange Commission, its Division of Corporation Finance, earlier this month, posted a new Compliance & Disclosure Interpretation regarding diversity disclosures. It discusses the Division's interpretations of Regulation S-K, specifically Item 401 (covering directors and executive officers), and Item 407, which addresses corporate governance disclosure obligations.

The addressed question: In connection with preparing Item 401 disclosure relating to director qualifications, certain board members or nominees have provided for inclusion in the company's disclosure certain self-identified specific diversity characteristics, such as their race, gender, ethnicity, religion, nationality, disability, sexual orientation, or cultural background. What disclosure of self-identified diversity characteristics is required under Item 401 or, with respect to nominees, under Item 407?

The answer: Item 401(e) of Regulation S-K requires a brief discussion of the specific experience, qualifications, attributes, or skills that led to the conclusion that a person should serve as a director. Item 407(c)(2)(vi) requires a description of how a board implements any policies it follows with regard to the consideration of diversity in identifying director nominees.

To the extent a board or nominating committee in determining the specific experience, qualifications, attributes, or skills of an individual for board membership has considered the self-identified diversity characteristics referred to above (race, gender, ethnicity, religion, nationality, disability, sexual orientation, or cultural background) of an individual who has consented to the company's disclosure of those characteristics, we would expect that the company's discussion required by Item 401 would include, but not necessarily be limited to, identifying those characteristics and how they were considered.

Similarly, in these circumstances, the Division would expect any description of diversity policies followed by the company under Item 407 would include a discussion of how the company considers the self-identified diversity attributes of nominees as well as any other qualifications its diversity policy takes into account, such as diverse work experiences, military service, or socio-economic or demographic characteristics.

Meanwhile, Rep. Gregory W. Meeks (D-N.Y.) has introduced the Improving Corporate Governance Through Diversity Act of 2019, a bill which would require public companies to annually disclose the gender, race, ethnicity, and veteran status of their board directors, nominees, and senior executive officers. The bill’s companion bill in the Senate was simultaneously introduced earlier this month by Senator Bob Menendez, a member of the Senate Banking Committee.

“Diversity has been proven to have a positive impact on business performance, and it is only natural for investors to want to know which companies are choosing to bring in a wealth of different perspectives into their corporate board rooms,” Meeks said in a statement. “Revealing the gender, racial, ethnic, and veteran makeup of these corporate C-suites and boardrooms will not only shed light on the value of diversity, but hopefully encourage corporate shareholders to increase diversity in the highest ranks of their corporations.”

“There is a diversity problem in our nation’s top-performing companies,” Menendez added. “As our country undergoes tremendous demographic and economic change, it is time the leaders of America’s most successful companies recognize that diversity is not just a buzzword—It’s a deliverable.”

In greater detail, the bill:

  • Empowers the SEC’s Office of Minority and Women Inclusion (OMWI) to publish triennially best practices, in consultation with an advisory council of investors and issuers, for compliance with these enhanced disclosure rules;
  • Mandates OMWI to create an advisory council consistent with the Federal Advisory Committee Act requiring formal reporting, public openness and accessibility, and various oversight procedures; and
  • Allows OMWI to solicit public comment on its best practices publication consistent with the formal rulemaking process under the Administrative Procedures Act.

The legislation is supported by the NAACP, the Council for Institutional Investors, and the U.S. Chamber of Commerce.

In a letter to Meeks, the Chamber wrote that it supports the bill and “efforts to increase gender, race, and ethnic diversity on corporate boards of directors.”

The letter cites PwC’s 2018 Annual Corporate Directors Survey. It found that 94 percent of the board directors surveyed indicated that “a diverse board brings unique perspectives”; 84 percent responded that diversity “enhances board performance,” and 91 percent reported that their boards are taking steps to increase diversity.

The “legislation, the Chamber wrote, “would establish a model to organically boost diversity on boards, rather than the counterproductive quota-driven strategies that some jurisdictions have attempted.”

Jeffrey Mahoney, general counsel for the Council of Institutional investors, had similar praise for the legislative effort. “The Council believes a diverse board has benefits that can enhance corporate financial performance, particularly in today’s global market place,” he wrote. “Nominating committee charters, or equivalent, ought to reflect that boards should be diverse, including such considerations as background, experience, age, race, gender, ethnicity, and culture.”

“We believe the proxy statement disclosures that would be required by the Act could contribute to enhancing U.S. public company board consideration of diversity generally consistent with our policies,” he added. “As long-term investors, our members benefit from the long-term shareowner value that may result, in part, from embracing diversity.’

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